Wednesday, December 15, 2010

As 2010 draws to a close, among the important pieces of unfinished business at the FCC is the ongoing problem of "access stimulation" or "traffic pumping." The current intercarrier compensation system creates some unfortunate efficiency-killing arbitrage opportunities, and traffic pumping is one of them. Traffic pumping costs voice carriers millions of dollars each year. As long as rural voice services continue to be subsidized under the existing unreformed intercarrier compensation system, it is only sensible that the FCC immediately take narrow and targeted steps to prevent bad actors from taking advantage of the subsidy system it oversees.

Traffic pumping is a form of regulatory arbitrage arising out of the intercarrier compensation system's formula for assessing interstate access charges. To simplify, long-distance or interexchange carriers (IXCs) that originate interstate calls are required to make access charge payments to an end-user's local exchange carrier (LEC) that terminates such calls. Under the legacy intercarrier system, interstate access charges are particularly favorable to rural LECs. Rural competitive LECs, in particular, enjoy special exemptions that result in significant access charge revenues for those LECs. In other words, the current system subsidizes the cost of services provided by rural LECs through interstate access charges paid by IXCs that originate calls to LECs that terminate calls. The intercarrier compensation system is set up to transfer significant costs for voice services in rural areas onto voice services in urban areas--and thereby reduce the price of rural services for rural customers.

To simplify further, the current formula for assessing interstate access charges is premised on certain assumptions about the voice traffic history for rural LECs. Such rural LEC networks, it is assumed, have small customer bases and small associated amounts of per-minute interstate traffic that are terminated on their networks. But traffic pumping is a clever tactic for LECs to take advantage of interstate access charge regime, confounding the underlying assumptions of the system.

In recent years, some small LECs have entered into traffic pumping business arrangements with other entities to provide customers across the country a variety of "free" interstate and international conference call services or similar services that terminate on numbers in the LECs' networks. This results in surging amounts of interstate traffic being terminated on an LEC's network, despite the fact that no local customers are in any way associated with the terminating calls. LECs then bill IXCs for terminating the interstate calls they receive, reaping even larger above-cost interstate access charge revenues.And that means large interstate access costs incurred by IXCs. One recent study concluded that IXC losses due to traffic pumping amounted to some $2.3 billion.

The prevalence of traffic pumping practices eventually prompted the FCC to issue a Notice of Proposed Rulemaking to address the subject. As the FCC indicated in the NPRM,

We tentatively conclude that a rate-of-return carrier that shares revenue, or provides other compensation to an end user customer, or directly provides the stimulating activity, and bundles those costs with access is engaging in an unreasonable practice that violates section 201(b) and the prudent expenditure standard. On its face, the compensation paid by the exchange carrier to the entity stimulating the traffic is unrelated to the provision of exchange access.

That NPRM was issued in October 2008. Since then, however, the Commission has not acted on it. Instead, the Traffic Pumping NPRM docket has become a battlefield of ex parte filings. Meanwhile, traffic pumping practices continue, with numerous complaints filed by IXCs piling up at the FCC, at state public commissions, and at federal and state courts.

The National Broadband Plan sensibly acknowledges that "[m]ost ICC rates are above incremental cost, which creates opportunities for access stimulation, in which carriers artificially inflate the amount of minutes subject to ICC payments." As a prelude to long-term, comprehensive reforms of the intercarrier compensation system and universal service, the Plan recognizes the need for a quick fix to address regulatory arbitrage problems such as traffic pumping. Recommendation 8.7 in the Plan calls on the FCC to "adopt interim rules to reduce ICC arbitrage," which includes "rules to reduce access stimulation and to curtail business models that make a profit by artificially inflating the number of terminating minutes." In short, the Plan calls on the FCC, while it tackles intercarrier compensation reform more broadly, to make a band-aid fix for the problem it previously recognized in the Traffic Pumping NPRM.

The FCC should act fast to put an end to traffic pumping arbitrage activities. A clear problem exists. The Commission has already recognized the problem, and both the FCC and the National Broadband Plan have highlighted the need to address it. So what is the FCC waiting for? For starters, the FCC could set out some basic parameters defining the practice of traffic pumping and declare it impermissible for an LEC to apply its tariffed switched access rates to such conduct.

When it comes to traffic pumping, interim action by the FCC should be undeterred by any of the supposed complexities arising from the conceded necessary long-term, comprehensive reform of the intercarrier compensation system and universal service regime.

There is nothing that should be holding the FCC back from taking swift action against traffic pumping. Unfortunately, the FCC has been holding itself back and allowing arbitrage activity to continue. By 2011 it will be well past time for the FCC to have dealt with this problem. FCC efforts to tackle traffic pumping problems need not wait a day longer.